It is not expected to raise funds through issue of shares this year as the borrowings along with internal resources will enable the firm to fund the Rs 14,000 crore buyout Sarita C Singh | ET Bureau | December 14, 2018, 07:38 IST

NEW DELHI: State-run Power Finance Corp (PFC) plans to fund its acquisition of REC by borrowing Rs 7,000 crore from domestic banks, for which negotiations have begun, and is likely to moderate its dividend pay out as well as disbursements to loan accounts this financial year. The company is also banking on a special dividend from REC Ltd after the acquisition, said a government official.

It is not expected to raise funds through issue of shares this year as the borrowings along with internal resources and several other steps will enable the firm to fund the Rs 14,000 crore buyout as well as manage the capitalisation issue, the official said.

Credit rating agencies have put the company on credit watch after announcement of the deal. Moody’s Investor Service Thursday said it has placed the ratings of PFC and REC on review for downgrade. ICRA has placed debt programmes of both companies under watch till valuation of the deal.

The Union cabinet last week approved sale of government’s stake in REC to PFC along with transfer of management control, in a deal estimated to raise over Rs 14,000 crore disinvestment proceeds. A ministerial committee comprising finance minister Arun Jaitley, power minister RK Singh and road transport minister Nitin Gadkari will work out modalities of the acquisition based on proposals submitted by a committee of secretaries.

“PFC borrowed Rs 77,000 crore from the market last FY and normally borrows Rs 65,000-70,000 crore in a year. Therefore, it should not have liquidity concerns while raising funds for the operations and acquisition deal,” he said.

About Rs 500 crore capital is likely to be released by the end of this month through merger of the company’s renewable energy arm PFC Green Energy. “All these measures along with unwinding of its stressed assets should help the company in sailing through the buyout of REC,” he said.

The official said given the higher capital adequacy and bigger balance sheet, PFC is in a better position to manage the risk on capitalisation ratios. “PFC may have to raise tier-II capital, which is a normal market borrowing in the form of subordinated debt. The company has informed us that being a regular whole sale market borrower this should not be a significant challenge,” a MoF official said.

RBI guidelines require NBFCs to maintain capital adequacy ratio of 15%. As on September 30, 2018, PFC’s capital adequacy ratio was 17.91%, while that of REC was 16.14%. PFC’s balance sheet stood at Rs 2,95,483 crore while REC’sstood at Rs 2,66,102 crore as on September 30.

The department of investment and public asset management (Dipam) on Thursday invited asset valuation companies for REC Ltd. The companies have been asked submit their proposals by January 3. PFC is in the process of appointing legal advisors and transaction advisors for the deal. REC Ltd, being a non-banking finance company (NBFC), will soon have to approach RBI for the acquisition.

India Ratings & Research (Ind-Ra) has said the acquisition of REC Ltd will stretch the balance sheet of PFC with an impact on its return on assets and return on equity but the positive cash flow of the latter over October 2018 to March 2019 will address the liquidity concerns.